COLUMN-Zero carbon prices beckon, no disaster: Gerard Wynn

LONDON Jan 24 (Reuters) - The European Commission can win
significant gains from defeat on its carbon market reform if it
can extract concessions for a more ambitious scheme from 2020.

The European Parliament energy and industry committee on
Thursday rejected the Commission's planned, modest boost to
carbon prices, spotlighting the mountain it has to climb.

The vote saw carbon prices tumble as much as 40 percent on
the day before they recovered a little. A more critical vote
awaits the parliament's environment committee on Feb. 19, where
an unlikely rejection would halt the reform in its tracks.

European Union carbon prices are poised to fall to zero
because of an over-supply of allowances swollen by the financial
crisis, something the Commission is determined to avoid by
re-allocating emissions permits due this year and next until
later this decade.

Such rhetoric may be unwise, given opposition by powerful
polluting sectors and countries, German indecisiveness on the
issue ahead of federal elections later this year, and a looming,
larger debate about climate and renewable energy targets.

Hedegaard would snatch some kind of victory from defeat on
emissions trading reform if she achieved support instead for an
ambitious 2030 carbon emission cap, upon which debate is due to
kick off shortly with a Commission paper expected in the first
half of this year.

Such a cap will set the trajectory for the next trading
cycle of the scheme from 2020, and will guide not only emissions
trading but wider European energy measures and investment and so
is arguably a far more significant policy.

PHONEY WAR?

The present argument around carbon market reform is a phoney
war given it hinges on the timing of allowance auctions which
will only have a brief impact on carbon prices.

The bigger prize is subsequently to cancel permanently the
surplus allowances, as the Commission plans to do if it passes
this first step, and which would herald years of further
negotiations.

The Commission estimates that the scheme has a structural
surplus of emissions allowances of around 2 billion tonnes, or
one year's emissions under the scheme, which polluters can roll
forward year after year and some of which need cancelling.

Permanently removing around 900 million tonnes, the amount
the Commission has so far proposed to re-allocate, would see
carbon prices rise to 15 euros or so, analysts estimate.

From an economic perspective, a 15 euro carbon price would
have a noticeable impact on European electric utility costs and
wholesale power prices in liberalised markets.

It would add 6-12 euros per megawatt hour depending on
whether gas or coal is the marginal power plant, assuming full
pass through of carbon costs and compared with a zero carbon
price scenario.

That compares with European wholesale year-head power prices
of 40-55 euros.

From an environmental perspective, a 15 euro carbon price
would have no impact on the competitiveness of gas versus coal
combustion, and therefore rather little impact on carbon
emissions.

At current prices for British gas, European imported coal
and German year-ahead power, the carbon price would have to rise
far higher to drive power plants to switch from coal to less
carbon-emitting gas.

But the Commission's concerns are also about avoiding
institutional drift where traders, banks, advisers and NGOs
desert the market until its next trading cycle.

Some of that drift may be imagined: traders and analysts,
for example, switch easily between carbon and power markets.

For coal-dependent Poland, its campaign follows a long-run,
visceral objection to higher carbon prices which could crimp its
growth more than any other EU member state.

CHOOSING FIGHTS

A compromise in the present stalemate could include a
limited financial handout to the steel and aluminium sectors in
exchange for a smaller quota of emissions allowances, which may
keep Poland and polluting sectors happy and the market ticking
over.

Detail of such a compromise will emerge ahead of the next
parliament vote.

Failing that, all is not lost for emissions trading.

A zero carbon price would be temporary if the EU can agree
an economy-wide emissions cap which sets an ambitious trajectory
from 2020, capping factories and power plants.

Utilities hedge power sales and purchases of emissions
permits two to three years ahead, meaning carbon market activity
would pick up from 2017.

Such a 2030 emissions cap will be central to European energy
policy, and with more at stake negotiations will be testy and
concessions valuable.

Backing down on emissions trading would be difficult for the
Commission, consigning its market to limbo for four years.

It would be embarrassing to a world leader on emissions
trading, which has trumpeted the emergence of similar schemes in
Australia, South Korea, New Zealand, California and China.

The alternative, however, is years of negotiation over
deeper structural reform, which may end in failure, and will
suck oxygen not only from talks on a 2030 emissions cap but
other hugely significant low-carbon energy policies including
new mandates for auto fuel economy and carbon capture and
storage.